A Dozen Things That A Business Lawyer Should Know About The Bankruptcy Abuse Prevention And Consumer Protection Act Of 2005 - Part IV

Editor's note: Parts I, II and III of this article appeared in the February, March and April issues of The Metropolitan Corporate Counsel, respectively.

"One of the prime purposes of the bankruptcy law has been to protect creditors from one another." - Mr. Justice Black in Young v. Higbee Co., 324 U.S. 204 (1945).

Notice Requirements

The notice requirements applicable under the Bankruptcy Code have been extensively amended. The effect on bankruptcy notices and orders is unclear.

Many business lawyers scanning the ocean of literature on BAPCPA understandably assume that the notice amendments in §342 affect only individual cases and may be ignored in Chapter 11. That would be a serious mistake, because some of these amendments are not limited to consumer bankruptcies, and failure to comply with the new notice requirements may jeopardize orders entered in the case.

The key change is in §342(c), which states that any notice from the debtor to a creditor must contain the debtor's name, address, and taxpayer ID number. The prior version provided that failure to include such details did not affect the validity of the notice - but that proviso has now been deleted.

New §342(g)(1) is intended to provide a safe harbor for certain notices that do not otherwise comply with 342, and new §342(g)(2) describes the type of notice on which the court may predicate sanctions for a violation of the automatic stay. But neither the interrelationship of these provisions nor the requirements themselves are clear, and §342(g)(2) might amount to an effort to define the notice necessary to meet minimum constitutional standards.17 If that reading is adopted, other judicial determinations might not be binding on some creditors.

On the whole, the amendments to §342 misapprehend the nature of notice in bankruptcy cases, which are in rem proceedings.

Section §304 of the Bankruptcy Code formerly governed bankruptcy cases "ancillary to" foreign insolvency cases and proceedings. BAPCPA deleted that section in its entirety and replaced it with new Chapter 15 of the Bankruptcy Code, which authorizes the filing of a petition before the United States Bankruptcy Court seeking recognition of a foreign case or proceeding, and details mechanisms for addressing issues that arise in dual proceedings. Chapter 15 is drawn from the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission for International Trade Law ("UNCITRAL"), but departs from the Model Law as necessary to accommodate certain provisions of the Bankruptcy Code.

Under Chapter 15, a "foreign representative" may file a petition for recognition in a Bankruptcy Court. The petition must include a copy of the decision or order commencing the foreign proceeding and other documents to establish the authority of the foreign representative. Before ruling on the petition, the Bankruptcy Court may provide provisional injunctive relief to protect assets of the debtor or the rights of creditors.

A crucial determination for the Bankruptcy Court is whether the foreign proceeding is "main" or "nonmain," which dictates the applicability of certain provisions of the Bankruptcy Code. For example, if the foreign proceeding is recognized as a "foreign main proceeding," the automatic stay of §362(a) will protect the debtor and its property.

The Bankruptcy Court may also provide "additional assistance" under certain circumstances, a procedure analogous to that followed under prior §304. An important difference in the new law is that the Bankruptcy Court's decision to grant recognition does not turn on findings concerning the nature of the foreign proceeding. Rather, the Bankruptcy Court is required to cooperate to the greatest extent possible and may communicate directly with the foreign court or foreign representative.

The principal purposes of Chapter 15 are to facilitate cooperation and to provide for equality of distribution among similarly situated creditors in cross-border cases. The Bankruptcy Court may also apply the abstention provisions of §305 (substantively unchanged from prior law), effectively suspending or dismissing a Chapter 7 or Chapter 11 case if the purposes of Chapter 15 will be served by doing so.

There are, of course, far more than a dozen changes in business practice arising from BAPCPA. A few of the others are:

BAPCPA eliminates the dollar cap in the definition of a "single asset" real estate case, extending the stay relief requirements of §362(d)(3) to many large real estate projects.

The provisions of §366 defining "adequate assurance" under utility service agreements have been significantly revised, requiring Chapter 11 debtors to grant utilities favorable treatment at the beginning of the case.

Special provisions now apply to health care businesses in bankruptcy cases.

The provisions relating to "small business" cases have been revised and expanded.

BAPCPA introduced extensive, but largely technical, modifications to the treatment of financial contracts such as swaps, derivatives, forward contacts, and the like.

In an asset sale under §363, the estate will now be restricted from transferring certain documents containing "personally identifiable information," and in some circumstances a "Privacy Ombudsman" must be appointed.

Investment bankers seeking employment by the estate are no longer subject to the strict disinterestedness standard that generally governs the employment of counsel and certain other professionals.

Under §1114, it will apparently be possible to supersede the debtor's prepetition exercise of unilateral modification language in a retiree medical plan.

Many of the business bankruptcy amendments in BAPCPA resulted from a lobbying effort in which Congress did not consult persons with substantial Chapter 11 experience. Even where the amendments tackle problems that clearly warranted attention in business cases, the drafting approach appears likely to generate litigation expense and delay.

In that connection, business lawyers should consider BAPCPA's impact on loan workouts. Negotiated out-of-court agreements are usually far less expensive and disruptive than bankruptcy filings and are therefore to be encouraged. Chapter 11 often serves as a template for such workouts, because recalcitrant parties can sometimes be persuaded to agree by demonstrating that the treatment they are demanding would not be permitted in bankruptcy. Chapter 11 thus serves to promote bankruptcy reorganization policies even in situations where a petition is never filed. This supports the view that Chapter 11 serves its function best when it provides a mixture of flexibility and predictability that promotes compromise.

Unfortunately, some elements of BAPCPA introduce uncertainty or inflexibility in the very places likely to have an adverse effect on consensual restructuring. For example, the amendments create several absolute deadlines that undoubtedly provide comfort to favored parties in interest, but may cause problems both in and out of court. While the plan exclusivity limits will have neutral or positive effects in some cases, in other circumstances they may inappropriately empower a "spoiler" constituency even though the debtor and the majority of creditors believe that an extension of exclusivity is in their mutual best interests.

Of greater concern may be that the advantages afforded certain creditors in a Chapter 11 case will dominate strategic decisions concerning the timing of, or need for, such a case. For some debtors, the value of the reclamation and priority rights given to trade creditors under §503(b)(9) and §546(c) will fluctuate immensely with business cycles, distorting the choice between a Chapter 11 filing and a workout. Similarly, BAPCPA gives certain utility companies and landlords rights in Chapter 11 superior to anything they could realistically expect under state law.

Only with time will the business community fully apprehend BAPCPA's merits and defects, as lawyers and judges apply and interpret its provisions in actual cases. However, two things are certain - some provisions that have sparked great concern will turn out to be much less of a problem than expected, and other provisions will generate disputes that no one foresaw. 17 See Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306 (1950).

Published May 1, 2006.

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